Jeremy Warner's Outlook: For the Sage of Omaha, Tesco ticks all the right boxes, even with its plunge into the US market

Taxing beds: another mad and bad idea; World economy: an optimistic view; BAA: there goes another gravy train
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The Independent Online

For any company, there could scarcely be a greater accolade or vote of confidence in the management than to have Warren Buffett, the legendary investment guru, join the share register. Mr Buffett has long been saying he's about to turn his attention to Europe in his never-ending hunt for decent long-term investments.

By choosing Tesco, albeit for an initially quite small investment by his standards, he only confirms his oft-stated investment principles. Indeed, it is a wonder it has taken him so long to spot the opportunity. Tesco fits virtually all his criteria like hand in glove - a powerful, well managed brand with commanding market position which puts the customer first and invests strongly in its long-term future. It is hard to think of a company that ticks so many of Mr Buffett's boxes.

One irony of the £200m investment is that just as Mr Buffett is starting to run scared of investing in the US economy, Tesco is wading in, with a proposed chain of convenience stores in California. Yet on this front too, Mr Buffett would no doubt approve the strategy. Tesco has spent years investigating and planning its assault on the US, and now that it is finally taking the plunge, it is doing so in a manner which has very limited downside and stands every chance of success.

Sir Terry Leahy, the chief executive, is not about to risk his legacy with some madcap roll of the dice. Even the Sage of Omaha would struggle to show such sureness of foot.

Taxing beds: another mad and bad idea

No tax is a good tax, extreme libertarians are prone to argue, yet few would seem as counterproductive as the "bed tax" being proposed by the Local Government Association. This extraordinary invention seems to come straight out of the same mindset that brought the hated "window tax" of the 18th and 19th centuries, the vestiges of which can still be seen today in the bricked up windows of various London buildings.

Andrew Cosslett, chief executive of InterContinental Hotels Group, worked himself up into a right old lather about it yesterday when announcing first-quarter results. As far as we know, the idea has not yet been accepted by Sir Michael Lyons, who is reviewing local government funding on the Government's behalf. Yet when it comes to local government finance, anything is possible, and we know that ministers want business to pay more towards it somehow or other. So Mr Cosslett is right to attempt to pre-empt this madness at an early stage.

What the local authorities want is the right to impose a 5 per cent tax on use of all hotel beds. Taking into account existing payments of VAT, this would raise the tax on hotel accommodation to 23.375 per cent, a rate beaten within the EU only by Denmark.

Research by Nottingham University demonstrates that any 1 per cent increase in prices relative to competitors reduces international tourism by an equal and opposite amount, so though the measure might raise money for local authorities, it would be entirely self defeating as far as the economy as a whole was concerned.

Britain's balance of payments deficit in tourism is already £18bn a year and rising. We've got the Olympics coming up in six years too. British hotel prices are already iniquitous enough. Do we want totally to price ourselves out of the market?

World economy: an optimistic view

Amid the gloom of recent days, it's refreshing to see there are at least still a few lone voices out there taking a relatively optimistic view of the long-term future. One of them is Peter Oppenheimer, head of European portfolio strategy at Goldman Sachs. Don't let the title of his latest tome - the pretentiously named "Globology Revolution" - put you off.

The point he makes is not exactly new, but it is a reassuringly positive one none the less for those who had started to believe the doom-laden talk of financial and economic Armageddon. Look through the present bout of jitters in capital markets, and the longer-term outlook is still extraordinarily benign. Why does he say this?

According to Mr Oppenheimer, technology, globalisation and the industrialisation of China and India effectively underwrites a prolonged continuation of low inflation, above trend growth with maintained buoyancy in corporate profits. In his view, the productivity gains to be derived from the take up of new technologies are only just beginning. These gains combined with an explosion in the size of the global labour force, through the industrialisation of previously backward economies, provide a powerfully conducive backdrop to continued growth.

If this sounds eerily like a reworking of "the new paradigm", much touted in the late 1990s to justify sky-high equity valuations, that's because it is. Globalisation and technology, it was said back then, had massively reduced growth volatility as well as ushering in a golden age of low inflation. That was going to reduce the equity risk premium permanently.

As it happens, proponents of these theories were partially right. It was just that some of the conclusions drawn from them - particularly with regard to equity valuations - were wrong. The economic cycle hasn't been entirely abolished, yet the troughs are much shallower than they used to be, and even with high oil and commodity prices, inflation is still remarkably tame by past standards.

Nor is there anything particularly "new" in the present set of economic circumstances. It is just that you have to go further back in time, beyond the cyclical boom and bust of the post-war years, to find parallels. As Mr Oppenheimer observes: "Some of the changes brought about by this revolution make comparisons with the cycles of recent decades unhelpful." Mr Oppenheimer believes the impact of globalisation finds its most obvious parallel in the changes that occurred during the 19th century Industrial Revolution.

None of this means the present virtuous circle of low inflation growth will carry on for ever. You would truly have to take leave of your senses to believe that, for such an outcome would defy all historical precedent. All periods of relative economic stability eventually come to an end. Very probably it will be global imbalances that foreclose on the present one. But not quite yet.

BAA: there goes another gravy train

No wonder the City has just enjoyed a bumper bonus season. BAA, the airports operator, has already run up bid expenses of £15m, according to figures announced yesterday, and that's before the bidding proper even began. The £15m already spent runs only to the end of March, which covers only the phoney war period of the bid before Ferrovial of Spain formally launched its hostile takeover bid. It takes no account of the "non" defence document issued since then, or the racheting up of expenses that will occur if Ferrovial takes the offer on to the next stage by raising the terms. Indeed, there has so far been no proper defence at all, as BAA considers the offer as it presently stands as too low to be taken seriously.

Curiously, the takeover code requires BAA to issue final details of its defence before the bidder is required to decide whether to increase the bid. We thus have the very real prospect of an extraordinarily expensive defence being launched against a bidder which may turn out to be largely a mirage. The centrepiece of this defence is expected to be a capital return of up to £2bn. Quite what the cost in fees might be for such an exercise is anyone's guess, but it seems unlikely BAA will emerge from the bid with any change out of £40m.

For Mike Clasper, the chief executive, this must seem like daylight robbery. A working class lad, he's fond of saying: " I may have been born in Sunderland, but I wasn't born yesterday." Still, at least he can console himself with the thought that the costs won't come as a surprise to his chairman, Marcus Agius. As a long-standing Lazard's man, Mr Agius is as well versed as any in the City's grand old tradition of fleecing the client.

j.warner@independent.co.uk

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